Tax loss harvesting is the practice of selling a security such as Mutual Funds, Exchange Traded Funds (ETF), Stocks or Bonds that has experienced a loss. By selling or realizing at a loss, investors are able to offset taxes on both gains and income. The sold investment is immediately or sometime after replaced by a similar one, maintaining your desired asset allocation.
This strategy could potentially benefit you to offset already realized capital gains for the year and up to $3,000 per year on taxable income ($1,500 if married filing separately).
You should check for the opportunities throughout the year, while keeping your money in the market. You can also get some help if you want to automate this process.
Here is an example:
You earned $50,000 in wages from your job and you sold $10,000 worth of ABC Mutual Funds with cost basis of $15,000. In this case, you incurred $5,000 in capital loss.
$50,000 (wages) – $3,000 (capital loss this year and the remaining $2,000 must carry over to the following year) = $47,000 (Adjusted Gross Income)
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